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Six Major Trends in US Retail Banking

Alex Jimenez

Managing Principal, Financial Services Consulting
Blog
  • Financial Services

By many accounts, 2021 was a year filled with uncertainty throughout the global banking industry, as evidenced by the results of our 2021 global Consumer Banking Report. The US market reflected many of those same uncertainties we saw globally. While yearly earnings, particularly for the large banks, were at a record pace, ongoing waves of COVID-19 continued to impact customer behavior and made bankers nervous. As we look ahead to the rest of the year and beyond, we should first spend some time looking at 2021 to understand what happened, beyond the hype, before we define what’s ahead.

Looking at 2021 in Hindsight

Industry predictions based on customer behaviors called for an acceleration of digital banking adoption and closures of bank branches. These predictions seemed to come true. According to the S&P Global Market Intelligence Report, banks across the country closed a record of 2,927 branches, a 38% increase over 2020’s previously-established record of 2,126. In the meantime, Bank of America reported, “Record levels of digital engagement among new and existing clients last year. The company’s 39 million digital clients, including 31 million active mobile users, increasingly adopted key features within its mobile and online platforms – including mobile check deposits and digital lending applications, Erica®, Zelle®, Life Plan® and CashPro®.”

Predictions also called for a reduction in customer satisfaction and trust for “legacy banks” in favor of fintech and digital-only banks. However, J.D. Power Reports for retail banks and national banks show increasing levels of satisfaction. In the meantime, European neobank darlings N26 and Monzo exited the US market, having misjudged the opportunity.

To explain the situation, Paul McAdam, senior director of banking services at J.D. Power, notes “Customers have come to expect the nation’s largest retail banks to be able to meet them on their terms across all channels, delivering a flexible, highly engaging experience along the way.”

In 2021 we conducted a global survey of banking attitudes and behaviors. Looking at results specific to US banking customers, we found several results aligned with these data points. In agreement with J.D. Power, we found that US banking customers are quite satisfied with their primary banks and are not looking to change. On average, 81% of U.S. respondents were satisfied with their current banking relationship (Extremely Happy or Slightly Happy). For regional banks (covered under J.D. Power’s definition of national banks), we see even higher satisfaction at 83%.

Satisfaction, however, doesn’t translate to loyalty. The younger the consumer, the less loyal they seem to be. At the same time, the younger the consumer, the more likely they are seeking digital experiences and would switch to a digital bank. Along those same lines, consumers over 54 still see local branches as the main characteristic of a desirable bank, while those younger are less likely to view local branches in the same way.

Looking Ahead Through 2022 and Beyond

With all these details in mind, we have defined six interconnected trends that we see in retail banking for the next two years.

  1. Next generation experiences
  2. New digital business models
  3. Data driven banking
  4. Seamless payments
  5. Infrastructure futureproofing
  6. Enhanced security and fraud prevention
Next Generation Experiences

A few years ago, a feature-rich mobile app was a differentiator. After two years of curbside delivery, home-shopping, expedited delivery, Zoom videos, and working or schooling from home, consumer expectations for banking experiences can’t be addressed by more functions on an app. Customers expect all banking experiences to be coordinated regardless of channel and to be as personalized as what they experience from Amazon, Netflix, or Peloton.

New Digital Models

A decade ago, fintech firms aimed to put banks out of business. However, anyone that was present at Money 2020 this past year can attest that the most spoken word by fintech firms attending was “partnerships.” While APIs and the idea of open banking aren’t new in the US, 2021 saw a continuing evolution of the relationships between banks and fintech innovators. At the same time, we are seeing an increasing number of consumers “curating” digital banking experiences by combining their primary bank with all kinds of fintech solutions (e.g., Acorns, Robinhood, etc.). Finally, more and more organizations are working together to cooperate on consortiums. For example, Alloy Labs Alliance is a consortium of community banks looking to “leverage their network and accelerate innovation.”

Data-Driven Banking

While banks have a massive amount of data on their customers, the industry by and large has not been able to mine it like other industries. For organizations to be able to offer the hyper-personalized experiences expected by consumers, particularly tenured customers, they need to greatly improve their ability to access, analyze, and act on their existing data. Merely segmenting customers and presenting them with advice, offers, and service based on broad groupings isn’t going to cut it. Likewise, managing a bank with data no longer means pouring through previous results. Modern management requires real-time data and predictive analytics that allows managers to make smarter decisions.

Seamless Payments

The growth of embedded payments continues. Whether it’s through set-it-and-forget-it routines, like those for Uber, Lyft, and Amazon, or with the growth of contactless and mobile wallets, consumers are experiencing and expecting frictionless buying experiences. The disintermediation of banks from the payments process is not yet complete. It is high time for banks to try to get back ownership of a process that often leaves them holding the bag when issues or fraud occurs. Banks must take the lead in managing how real-time payments roll out. If payments are ceded to others, the holding checking accounts may also go, and with them, liquidity that funds loans.

Infrastructure Futureproofing

Once, I was involved in the rollout of a mortgage underwriting system that took six years. Timelines like that cannot exist in banking anymore. To address the requirements of new business models, next generation experiences, seamless payments, and data-driven decisions, banks need to take a critical look and manage technology stacks better. Futureproofing goes beyond hardware, software, and integrations. New ways of thinking and managing technology need to be deployed including agile methodologies and new partnerships with companies that can move quicker than the legacy banktech providers.

Enhanced Security and Fraud Prevention

While technology and consumer expectations evolve, fraudsters are also evolving.  Cyberthreats seem to evolve quicker than banks can deal with them. At the same time, consumers are expecting less and less friction in all processes. Luckily, growing regtech and cybersecurity ecosystems offer solutions that can bridge the gap for banks that are willing to re-imagine their processes.

Conclusion

Any banking executive worth their salt knows how to prioritize. However, this isn’t a situation where one or two of these trends takes top billing. For banks to compete and thrive in this environment, they must be able to juggle all six of these trends all at once. This requires a concerted effort that should involve all parts of the organization. This transformation goes well beyond technology but starts with a clear vision, a well-designed strategy with goals and metrics, empowered teams, iterative work, and partners that can support the hard work of business model redesign.

EPAM’s financial services capabilities can help banking organizations with the juggling act. Our business consultants have experience working within and with banks in defining a vision, a strategy, and a roadmap. Our designers and UX experts can build the digital and cross-channel experiences that consumers are looking for. Our experts can help stand up innovation practices within an organization. Our education experts can help with the people part of the transformation. Our engineering practices can help with all the technology-heavy lifting. Finally, our platform partners, such as Adobe, Salesforce, Acquia, and Sitecore, can be the backbone of new models.

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